In-Depth Look at Title Hearings

Concerned about multi-million dollar settlements and the findings presented by state investigations of industry fraud, Oxley asked the GAO, Congress’ investigatory arm, in January to issue a report. In a one-two punch last week, GAO presented its findings while the Subcommittee on Housing and Community Opportunity also held hearings on the topic.

“GAO’s interim report raises some very troubling questions for Members of this Committee,” Oxley said in a written statement.

Costs and practices common to title insurance require further scrutiny because they are not typical of other lines of insurance, GAO found.

Most states do not review title insurance costs or the extent to which they regulate title agents is not clear, GAO said. Also, the extent to which title companies benefit borrowers isn’t clear because prospective borrowers don’t shop around for another title insurer. In addition, mortgage or real estate brokers may have a conflict of interest owning a title agency. Finally, although multiple regulators oversee the different entities involved in the title industry, coordination among the regulators is not clear.

Recent state and federal investigations have identified illegal activities — mainly involving kickbacks — merit further scrutiny, the survey said.

Participants allegedly used several methods to cover the kickbacks including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several “shell” title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, serving only to obscure referral payments.

The study also found that “reverse competition,” in which title agents market their real estate services to real estate agents and mortgage lenders is a problem.

“GAO is finding that instead of focusing on consumers, title agents normally market their business to these real estate providers, creating a potential conflict of interest that benefits the providers at the expense of the consumer,” Oxley said in the written statement.

Subcommittee Hearing Testimony
Industry participants who testified last week before the Subcommittee on Housing and Community Opportunity also spoke of kickbacks in the industry.

Minneapolis-based Title One Inc. President and CEO Douglas R. Miller testified that, with rates 40 percent lower than the competition and a six-figure annual advertising budget, his 55-employee company is having a hard time competing. “Because in Minnesota, the playing field is not level as the title insurance industry and the real estate industry have locked-up almost the entire marketplace through controlled business schemes,” he testified.

Miller charged that while several different businesses appear to be involved, they all involve steering real estate consumers into “overpriced” services for “secret” profits. He said the activity involves over 90 percent of all residential real estate transactions in his area and has caused the Minneapolis/St. Paul area to have the highest closing costs in the nation — more than twice the national average.

Miller said that devising schemes to bypass RESPA’s prohibitions against financial payments for the referral real estate settlement services has become the norm. He said that in Minnesota two business models predominate: full service title companies that are affiliated with real estate brokerages and sham title companies created to filter referral fees. Miller said that he knows of hundreds of small sham title companies.

However, Arthur Sterbcow, president of New Orleans-based Latter and Blum Realtors, countered, “I have been in the real estate brokerage industry for many years and do not believe that real estate brokers or agents who don’t otherwise receive illegal kickbacks are going to risk their real estate commission or damage their relationship with their customer by recommending that they go to an overpriced, unknown or disreputable title agency.”

Sterbcow’s company reportedly owns several affiliated-businesses including Essential Title. He testified as a member of the Board of Directors of the Real Estate Services Providers Council, Inc., a national non-profit trade association of approximately 275 residential real estate brokerage firms, mortgage lenders, home builders, title companies and other settlement service companies. Sterbcow said the companies all offer one-stop shopping for home buyers and owners through affiliated businesses and strategic alliances.

Sterbcow said affiliated companies can save consumers money and provide convenient, one-stop shopping, citing a 1992 study which found affiliated title companies in Minneapolis-St. Paul charge about $13 less for a basket of title services than unaffiliated title companies. A 1994 study involving seven states including Florida, Pennsylvania and California, reportedly concluded title services for transactions involving affiliated title companies not only are competitive with those provided by unaffiliated title companies, but actually result in a 2 percent cost savings.

He also said that “reverse competition” is not wrong as long as the agents and brokers have the same interest as the consumer — to get the transaction done quickly and cheaply by a reputable title company.

He also said that after restrictive legislation in Kansas went into effecting 1992 that caused real estate broker-owned title companies to shut down, the two largest title companies in Wichita County, which had been the most competitive title marketplace, raised their rates 50-60 percent.

J. Robert Hunter, Director of Insurance for the Consumer Federation of America, disagreed with Sterbcow. He testified that consumers are getting the short end of the stick because they assume that real estate agents and brokers are acting in the consumers’ welfare when they suggest a title insurance agency, that consumers wrongly believe that the cost of such services is fixed and that consumers are poorly situated to exert pressure on the price of title insurance.

Hunter suggested that kickbacks could be remedied by replacing title insurance with a system — the Torrens title system — used in Iowa and widely used in Europe or by making lenders pay for title insurance. Under the Torrens system, once a borrower’s name is recorded on the title register, the registrant becomes the owner of the property to the exclusion of all others, by the very fact of registration.

Other State and Federal Scrutiny
The subcommittee hearings and GAO report came on the heels of state and federal scrutiny of the industry.

The Colorado Insurance Department has pledged to close this year 180 affiliated sham real estate business. It closed 11 in 2005.

California settled last year claims of kickbacks to mortgage professionals that refunded $37.8 million to consumers.

Michigan settled a class action this year brought by 60,000 households against four title insurers for $27.5 million. Arizona settled last year an anti-kickback case for $1 million.

New York Attorney General Eliot Spitzer is reportedly investigating whether national title insurance firms have been illegally paying rebates and referrals to real estate intermediaries that have increased title insurance premiums for homeowners.

The Department of Housing and Urban Development has reached settlements or is investigating title insurance practices in Tennessee, Michigan, Georgia and Oklahoma.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.